MoneyGram to pay $18 million in scam

Article by: CHRIS SERRES

Star Tribune

October 21, 2009 - 9:39 AM

Alan Schiller just wanted to make a few hundred extra dollars when he responded to a Help Wanted advertisement looking for market researchers posing as shoppers. What he got instead was a bit part in a series of multimillion-dollar scams that U.S. regulators say was met with a blind eye within St. Louis Park-based MoneyGram International.

On Tuesday, MoneyGram agreed to pay $18 million and undertake a series of anti-fraud measures to settle allegations by the U.S. Federal Trade Commission that it allowed its system to be used by fraudulent telemarketers in Canada who bilked U.S. consumers out of more than $80 million between 2004 and 2008. The settlement is the largest of its kind involving the FTC and a money transfer company.

The scam cost Schiller thousands. On March 19, 2008, the Arlington resident cashed a $2,990 cashier's check from a company called Master Research Inc. and, following written instructions, wired the cash through a MoneyGram office in Mankato to a man in Bristol, New Brunswick. For this, Schiller was told he would receive $300, according to documents provided to the Star Tribune.

Days later, the bank told him the check had bounced and he was on the hook for the money. Master Research didn't answer the telephone and MoneyGram told him they couldn't help him, he said. (The number for Master Research has since been disconnected and the company could not be located.)

"The only consolation I've got is knowing I wasn't the only one scammed," Schiller, 58, who owns a company that makes construction equipment, said. "There are a lot of other people out there just like me."

The FTC alleged that, far from being a passive conduit, MoneyGram, which operates 180,000 money transfer locations worldwide, encouraged fraudulent activity by ignoring warnings from law enforcement officials and even its own employees that widespread fraud was being conducted over its network, according to a lawsuit the government filed in U.S. District Court in Illinois. MoneyGram also failed to investigate or terminate suspicious agents, and did not conduct adequate background checks of prospective agents, according to the lawsuit.

"We bring cases against the worst violators, and the ones that are responsible for the most consumer harm," said Mitchell Katz, a spokesman for the FTC. "In this case, that was MoneyGram."

As part of its settlement with the FTC, MoneyGram has agreed to provide consumer fraud warnings on the front page of all money transfer send forms; warnings noting the most common types of scams utilized on its system; and a toll-free number that consumers may call if they discover that their money transfer was the result of fraud. MoneyGram's $18 million payment to the FTC will go to refund consumers who have been victimized.

"While we don't agree with the FTC's allegations regarding our fraud prevention in the past, we can agree on fraud prevention today and in the future," Pamela Patsley, MoneyGram's chairman and chief executive officer, said in a statement. "We don't want our customers being victimized by third-party fraud."

Money transfers have increasingly become the payment method of choice for telemarketing scams that prey on U.S. consumers, according to the FTC. Con artists can pick up money transferred within as little as 10 minutes and often the payments are untraceable. Money sent to Canada can be picked up at any money transfer location in that country, making it difficult for law enforcement to identify the recipient. Consumer complaints involving the wiring of funds from the United States to Canada more than doubled from 2003 to 2007, when it hit 5,273 complaints, according to the FTC.

In one popular scheme, telemarketers working in Canada tell consumers that they've just won the lottery and ask consumers to send money via a wire transfer to cover the cost of taxes, insurance or courier fees. The money is sent, but the winnings never arrive.

Many of the other popular scams involve counterfeit checks. In many cases, consumers receive a cashier's check and instructions telling them to cash the check and send the cash by money transfer; but when the checks bounce, consumers are responsible for the withdrawn money.

Yet the schemes vary in their creativity. Cecilia, 71, a bookkeeper in South St. Paul who declined to give her last name, said she wired $4,200 through MoneyGram to a person who claimed to be her grandson suffering from a car accident after attending a concert in Montreal, Quebec. "My grandson loves concerts and the voice sounded just like him, so I believed it," she said. The unknown person called again the next day, wanting $3,200 to cover a leg injury. Cecilia was about to wire the money, when she called her grandson and discovered he was in his house in Newport and had never left the country.

"I was so happy that he wasn't hurt," she said. "Then I just wanted to get the people that did this."

At least 65 of MoneyGram's Canadian agents have been charged with or are being investigated for "acting collusively" in frauds, according to the FTC's lawsuit. In March, search warrants were executed on 16 MoneyGram agents in Montreal in relation to a mass-marketing fraud ring that included grandson scams, lottery scams and mystery shopper scams, the lawsuit said.

The FTC said only a small number of MoneyGram locations in Canada were involved in the vast majority of the fraud. According to the FTC, MoneyGram received five or more fraud complaints concerning 151 of its Canadian agents in 2006, or about 10 percent of them. These agents collectively received $83.3 million from the U.S. and accounted for 96 percent of the total fraud complaints.

"At least you know it's not something that's being done systematically," said Katz, the FTC spokesman. "On the other hand, you've got to know these people are problematic. Your data is telling you that. Your compliance people are telling you that. All you have to do is stop 10 percent of your agents."

However, Stephen Meili, a consumer protection and immigration law professor at the University of Minnesota, questioned whether it makes sense to pursue the "conduit" of fraudulent activity, rather than the perpetrators themselves.

"It sends a message to wire transfer companies that they do have to take note of the companies they're doing business with," Meili said. "But it misses the larger problem, which is that these scam artists can find other conduits with which to perpetrate the scam."

The settlement is just the latest in a string of setbacks for MoneyGram. Once a favorite on Wall Street, MoneyGram last year lost more than $1.6 billion from investments in securities backed by risky mortgages. The losses led the company to sell a majority stake to Thomas H. Lee Partners and Goldman Sachs in exchange for a cash infusion. The company has been hit with a number of class-action lawsuits accusing it of not being forthright with investors about the company's investments. Shares of MoneyGram fell 6 cents to $3.19 a share on Tuesday. Two years ago, they were trading above $30 a share.